The Hindu Business Line : Recap bond conversion to boost bank profits

Public sector banks' bottomlines have received a boost with the Finance Minister's move to convert recapitalisation (recap) bonds into marketable securities.

Bankers said that the proposal in the Budget for 2006-07 had obviated the need to make further investments for shoring up their statutory liquidity ratio (SLR) with deposit accretions.

This was because the recap securities would now automatically become eligible for SLR.

Barring the securities issued to Punjab & Sind Bank for shoring up the equity, the recap bonds with most of the PSU banks have coupons of 10 per cent with maturity of 10 years.

The revised estimate for recapitalisation support to P&S Bank this fiscal is Rs 500 crore. The new series of recap securities to Punjab & Sind Bank have coupons of 7 per cent, the same as those issued to oil companies. The only difference being bank securities would now become eligible for repurchase operations.

Shoring up income

Bankers said the move implied that the government would allow them to resort to sale of the recap securities for shoring up their incomes. But treasury operations on these securities, if any, were likely to take place only during the next financial year.

This was because the recap bonds were part of the "held to maturity" category of investments.

RBI norms

Under the current guidelines of the RBI, the shifting of investments from `held to maturity' to "available for sale" or "held for trading" is permitted only once a year.

For the current financial year, the exercise has been completed.

Consequently, bankers said that any bottomline impact would be reflected only in the first quarter results of the next financial year.

Not many keen

However, not many banks are likely to resort to any selling of the securities. This was because the residual maturity of recap bonds for most banks was just about three years.

This was in line with average maturity profile of their investments, they added.

Therefore, bankers said, they would instead prefer to hold the securities till maturity and resort to repos for meeting liquidity requirements.

Holding these securities till maturity also allowed them to realise good current yields in view of the high-coupon rates on the recap bonds.

These yields were much better than some of `AA' rated advances, the bankers added.

Message to PSBs

But the bankers said that the conversions also carried an implicit message to the public sector banks. The message was that return of capital would no longer be permitted on the same terms as in the past. Return of equity in the past had implied simultaneous redemption of the recap bonds.

The mechanism for return of equity to the government would change and support the case for charge of a premium.